UBTI: Making Sense of Unrelated Business Taxable Income for Nonprofits

A lot of the work of running a non-profit organization with tax-exempt status involves ensuring that the entity doesn’t engage in activities that could put its non-profit status at risk. Careful planning must go into the mission of creating the organization. Once the purpose or mission is solidified, managers must determine what activities to take on to raise funds and achieve that goal. What it comes to defining unrelated business taxable income (UBTI), the requirements aren’t always entirely clear. Here’s what non-profits need to know about this important tax issue.

Is a non-profit a business?

We don’t think of non-profits as businesses, but the IRS does! From the government’s perspective, non-profit organizations are businesses that are exempted from taxes because, in theory, they exist to pursue an altruistic or religious objective. Gaining 501c(3)(4) status does not come easy, but yet they need to raise funds for operations. So how does a non-profit continue to raise money to keep the mission going without violating IRS rules?

UBTI non-profit rules for raising money

Lawmakers recognized that non-profits would inadvertently raise some income unrelated to their exemption purposes and so included a margin of error of up to $1,000. The one-thousand-dollar allowance is one example of making money without having to pay state and federal taxes. Large organizations, hospitals, colleges, and charity organizations have a wide range of revenue flows from donations, investments, fundraising activities, and store sales. Income from these sources are generally safe bets.

Selling donated goods is always allowed. While technically, t-shirts, mugs, and baseball caps don’t further the mission of the organization, they may still be allowable. Rental income is another exclusion of UBTI rules. If somehow a branch of a non-profit becomes particularly successful at earning money that is unrelated to the primary mission, that can put the non-profit status for the entire organization at risk. Gray areas make it difficult for boards of directors to categorize some of this income which is why it is important to have a tax attorney or a CPA who specializes in non-profit tax filings.

The good news is the IRS can’t tell your volunteers what they can do to raise money for your organization. They’re allowed to collect money by selling products and services for the benefit of your organization without worry. According to the TheBalanceSMB, your non-profit can also provide conveniences for members, students, patients, officers, or employees.

Donations on the decline

For many years, homeowners were able to have their property tax payments treated as a tax deduction by the federal government. Changes began in 2018 resulting from the Tax Cuts and Jobs Act (TCJA) which capped a deductible portion of their state and local tax payments at $10,000. According to MarketWatch, The Governor of New Jersey responded with a law that set-up funds at the municipal level allowing homeowners to donate up to 90% of their tax bill in exchange for tax credits. The Trump Administration responded by suing the State of New Jersey.

This major change in tax code put a lot of the budgetary planning for nonprofits all over the country at great risk. For decades, non-profit organizations relied on the contributions of homeowners, who received a tax benefit for their support of charities. Because the internal revenue code (IRC) is still being clarified, it forced some patrons into a holding pattern.

Donations are, unfortunately, becoming affected by the change in the law and non-profit organizations will need to become more creative in how they generate new revenues in the event pledge dollars decrease or don’t materialize at all. However, in some cases, non-profit organizations may produce non-related income exceeding 20% but not above 50% and keep the exclusion from unrelated business income.

Find a non-profit tax professional

Taxes are tough, and when you’re running a non-profit, you don’t have time to fully comprehend all the exceptions and exemptions. Luckily, SD Mayer has numerous success stories with non-profit entities from decades of experience working with them. We have specialists ready to help you to be sure you can raise all the funds you need while following IRS’ rules for UBI and not jeopardizing your non-profit status.

If tax rules and regulations for your non-profit are making your head spin, get in touch with the financial experts at SD Mayer. We have decades of experience walking non-profits through all essential financial processes so that they can get back to doing what they do best: serving their communities. Contact us today for more information.

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